By Amanda Maine, J.D.
The Practising Law Institute (PLI) recently hosted a conversation with Justin C. Jeffries, an associate director in the SEC’s Atlanta Regional Office, and Sarah L. Levine of Jones Day, who had previously served as a senior advisor at the SEC. Jefferies and Levine discussed current developments in SEC enforcement, focusing on financial reporting. The discussion was part of PLI’s 36th Midyear SEC Reporting & FASB Forum.
Acting chair actions. Levine asked Jeffries about actions taken by then-Acting Chair Allison Herren Lee affecting the Enforcement Division. In February, Lee issued two statements regarding the SEC’s enforcement policies. One of the statements announced the reversal of a policy by former Chairman Jay Clayton; under the new policy, senior officers in the Division are authorized to approve the issuance of a Formal Order of Investigation. Jeffries noted that under the previous policy, subpoena power and taking sworn testimony would have to be approved by the co-directors of the Division of Enforcement.
The new policy empowers more than 40 senior officers in SEC offices around the country with this authority, Jeffries said. He praised the work of former co-directors Stephanie Avakian and Steve Peikin, who had to get through the high volume of requests from the regional offices, but he also lauded the new authority of regional SEC officers to act quickly to detect and stop ongoing fraud and protect vulnerable investors. Returning this authority to the senior officers in the Enforcement Division helps to ensure that investigative staff can work efficiently to protect investors in a time where the pace of fraud moves quickly, Jeffries said.
Lee’s other announcement reversed the Clayton-era policy of the Enforcement Division of considering waivers for well-known seasoned issuers (WKSI) in settlement discussions. In her statement announcing the change, Lee said that the "return to the division’s long-standing practice ensures that the consideration of waivers is forward looking and focused on protecting investors, the market, and market participants from those who fail to comply with the law."
Levine spoke about her own experiences while she was at the Commission with WKSI waivers, which she called "bad-boy waivers." Levine said that when she worked at the SEC, the WKSI waiver policy went back and forth—sometimes the waiver was a pro-forma issue, and sometimes it was it was separate from the Enforcement Division’s recommendation. Under the policy announced by Lee, the waiver issue has been returned to the Divisions of Corporation Finance and Investment Management and makes clear that issuers that settle with the SEC should not assume that a WKSI waiver will be granted, Levine advised. She added that this action has signaled a change in tone in the Commission’s goals and priorities, especially in enforcement.
ESG. Jeffries and Levine also discussed the SEC’s approach to environmental, social, and governance (ESG) disclosures. In addition to the request made by Acting Chair Lee in March for public input on the Commission’s current disclosure regime and potential changes relating to climate change, the SEC has also established a task force in the Division of Enforcement relating to climate and ESG issues.
Levine drew attention to the September 2020 SEC enforcement action against Fiat Chrysler as a possible example of what issuers might expect regarding ESG enforcement. In that case, Fiat Chrysler agreed to pay a $9.5 million penalty for its misleading disclosures about its emissions control systems. She also mentioned that Chair Gary Gensler has foreshadowed potential new rulemaking proposals on ESG issues in the second half of 2021.
Jeffries said that ESG and climate-related disclosure violations are being examined under the Commission’s existing framework. The enforcement staff will be looking at affirmative misrepresentations made by issuers regarding its climate policy or known climate-related events or risks. In addition, investment advisers will come under scrutiny from the staff to examine whether the funds that are marketed under the "ESG" nomenclature or similar "green" marketing words actually match their marketing with their investment strategies, Jeffries said.
SPACs. As special purpose acquisition companies (SPACs) have been in the spotlight recently do to the exponential increase in SPAC IPOs, Levine asked Jeffries how the Enforcement team will approach any possible violation related to SPACs. Jeffries remarked that the staff will continue to look at issuer statements to make sure they provide an accurate picture of the company’s financial condition, whether it be the SPAC or the acquired company. Regardless of how an acquisition is structured, the enforcement staff will still keep an eye out for fraud, Jeffries said.
Cyber. Regarding cyber issues, Jeffries said that SEC enforcement cases tend to fall into three buckets. One involves initial coin offerings (ICOs) and digital currency. Many of the SEC’s cases in this bucket resemble traditional fraud and Ponzi schemes, but there have also been developments regarding the registration of digital assets with the SEC, he advised. He pointed to the Southern District of New York’s order siding with the SEC in its motion for a preliminary injunction against tokens offered by Telegram. The court performed a thorough analysis of why the tokens were investment contracts under the Howey test, he said. According to Jeffries, the court’s opinion highlights the economic realities regarding the Telegram tokens.
The other two buckets involve cybersecurity issues and issuer disclosure. Jeffries noted that cybersecurity policies and procedures have become even more important with so many people working from home. Firms also need to be cognizant that their cybersecurity policies and procedures are pushed out to others they deal with, such as remote office branches and third-party vendors.
On issuer disclosure, Jeffries emphasized that the Commission will not second-guess good faith disclosures about cyber breaches. Issuers should not have to be asked to make technical disclosures about cyber intrusions that might make their systems even more susceptible to hackers, he remarked. Jeffries drew attention to the SEC’s case against Yahoo! as an example of when cyber breaches should be disclosed and what not to do in the event of a cyber breach. In that case, Yahoo! not only failed to disclose a 2014 breach until 2016 regarding information impacting over 500 million customer accounts, it also denied the existence of data breaches in its own filings.
Meme stock enforcement. When asked about potential enforcement actions against situations involving so-called "meme stocks" like GameStop, AMC, and the use of the Robinhood trading app, Jeffries said he could not discuss current matters under investigation, but acknowledged that the SEC does investigate matters of market volatility such as these. He also advised that the SEC has the authority to pursue instances of manipulative trading, spoofing and layering cases, and the traditional "pump-and-dump" schemes that have taken on a new focus with more people using the internet, including social media. Social media can create a buying frenzy resulting in an increase in the price of stocks, and the SEC has the tools to tackle these issues, Jeffries stated.